Introduction
Understanding retirement plans is crucial for business owners and employees alike. One option that has gained attention in recent years is the Single-Company Pooled Employer Plan (PEP). While PEPs were traditionally structured for multiple employers, changes in regulations have made Single-Company PEPs a viable solution for individual businesses looking to streamline retirement benefits. In this handbook, I will break down how Single-Company PEPs work, their advantages and drawbacks, and how they compare to other retirement plans.
Table of Contents
What is a Single-Company PEP?
A Single-Company PEP is a retirement plan where a single employer pools its employees into a professionally managed 401(k) structure. Unlike traditional 401(k) plans, which require extensive administrative oversight, PEPs centralize plan management under a third-party administrator. This model helps businesses reduce compliance burdens and operational complexities.
Key Features of a Single-Company PEP
- Employer Participation: Only one company sponsors the plan, unlike traditional PEPs that pool multiple employers.
- Plan Administration: A Pooled Plan Provider (PPP) handles compliance, reporting, and fiduciary responsibilities.
- Cost Efficiency: Lower administrative expenses due to economies of scale.
- Regulatory Compliance: Easier compliance with the Employee Retirement Income Security Act (ERISA).
How Single-Company PEPs Differ from Traditional 401(k) Plans
| Feature | Single-Company PEP | Traditional 401(k) Plan |
|---|---|---|
| Plan Sponsor | One employer | One employer |
| Administration | Managed by PPP | Employer handles |
| Fiduciary Liability | Shared with PPP | Employer retains |
| Cost Structure | Potentially lower | Higher due to admin fees |
| Compliance Burden | Lower | Higher |
How Contributions Work in a Single-Company PEP
Contributions to a Single-Company PEP function similarly to traditional 401(k) plans. Employees contribute a percentage of their salary, while employers may offer matching contributions. The maximum annual contribution follows IRS guidelines:
- Employee Contribution Limit (2024): 23,000
- Catch-Up Contribution (Age 50 and Over): 7,500
- Total Contribution Limit (Including Employer Contributions): 69,000 (or 76,500 with catch-up contributions)
Example Contribution Calculation
Assume an employee earns $80,000 per year and contributes 10% of their salary. The employer matches 50% of the employee’s contribution up to 5% of salary.
Employee Contribution:
80,000 imes 0.10 = 8,000Employer Match:
80,000 imes 0.05 imes 0.50 = 2,000Total Annual Contribution:
8,000 + 2,000 = 10,000Advantages of a Single-Company PEP
Lower Administrative Burden
Since a third-party administrator handles regulatory compliance and reporting, businesses avoid the hassle of managing these tasks internally.
Cost Savings
Employers can save money on administration and compliance costs compared to traditional standalone 401(k) plans.
Fiduciary Risk Mitigation
Under a Single-Company PEP, the Pooled Plan Provider assumes many of the fiduciary responsibilities, reducing liability for the employer.
Potential Drawbacks
Less Customization
Since the plan is administered by a third party, employers have less control over plan design.
Fees May Vary
While Single-Company PEPs can be cost-effective, some providers charge higher fees depending on plan size and structure.
How Single-Company PEPs Fit Into the Retirement Plan Landscape
| Retirement Plan Type | Administration | Compliance Burden | Cost | Fiduciary Responsibility |
|---|---|---|---|---|
| Traditional 401(k) | Employer | High | High | Employer |
| SEP IRA | Employer | Low | Low | Employer |
| SIMPLE IRA | Employer | Low | Low | Employer |
| Multiple-Employer PEP | PPP | Low | Medium | Shared |
| Single-Company PEP | PPP | Low | Medium | Shared |
When to Consider a Single-Company PEP
- Growing Companies: Businesses looking to provide robust retirement benefits with minimal administrative work.
- Small to Mid-Sized Employers: Companies that want cost-effective 401(k) solutions without extensive fiduciary responsibilities.
- Companies Seeking Compliance Relief: Businesses that want to ensure ERISA compliance with professional oversight.
Conclusion
Single-Company PEPs offer an innovative way for businesses to streamline retirement plan administration while ensuring compliance with regulatory requirements. By leveraging the expertise of Pooled Plan Providers, employers can reduce fiduciary risks and costs, making these plans an attractive alternative to traditional 401(k)s. If you are considering a retirement plan for your business, evaluating a Single-Company PEP could be a smart move.
